This fifth in a series of biennial reports by the Global Sustainable Investment Alliance (GSIA) outlines the state of the sustainable investment industry across five key regions, namely Europe, the United States, Canada, Australasia, and Japan, according to several key ‘drivers’ of growth (policy/regulatory, industry, customer and market). Additional market insights have been included from Latin America, Africa, the United Kingdom and other parts of Asia.

Globally, the value of sustainable investments, in terms of assets under management, has reached USD35.3 trillion, indicating 15% growth since 2018. However, the report notes that beneath this figure is an industry in transition. This transition is playing out differently across the regions explored in this report, thus leading to variations in the scale and growth of sustainable investments across the regions. Overall, GSIA reports that there have been several key developments globally that have expedited growth in sustainable investment industry. These are:

• The Paris Agreement
• The Sustainable Development Goals (SDGs)
• The Taskforce for Climate Related Financial Disclosures (TCFDs)
• United Nations Environmental Programs Finance Initiative (UNEP FI)

With this growth has come significant maturation of the industry, thus this report articulates revised definitions of the seven core sustainable investment approaches (first published in 2012) to realign with the industries matured understanding of sustainable investment. These approaches are:

• ESG Integration
• Corporate engagement
• Norms Based Screening
• Negative, exclusionary screening
• Best in class
• Sustainability themed
• Impact investing

Of these approaches, GSIA finds the most common investment strategy employed globally is ESG integration, with a total of USD26.4 trillion assets under management (AUM) integrating this approach. However, most notably, the report finds investment organisations are increasingly employing a combination of strategies, rather than just one, indicating an increasingly sophisticated approach to sustainable investing practices.

Overall, the regional highlights demonstrate that the policy and regulatory climate is shifting across all regions in favour of ESG:

• In Europe, better reporting, better labelling and stronger commitments, along with consumer demand for environmentally conscious investments, are strongly shaping the industry.
• In the US, undoing the damage of the Trump administration has been the focus of legislative reform, with racial and social justice investing a key driver of growth in this market.
• In Canada, mandatory TCFD disclosures and market participants are driving growth with diversity and inclusion similarly a key investment theme.
• Despite the lack of policy and regulatory progress in Australasia, alignment with the SDG’s, TCFD’s and high demand by retail investors for sustainable/responsible products has accelerated growth here.
• And in Japan, policy and regulatory drivers have been key to this market’s development, with social bond guidelines being published by the Financial Services Agency (FSA), and a rise in shareholder activism also forcing attention towards sustainable investments at the board level.

In addition to these key regions, significant developments across Asia, Nigeria, South Africa, Kenya, and Latin America indicate that sustainable investments are an unstoppable force that will continue to shape regional and global markets now and into the future.

1. According to the report, there are regional differences in the sustainable investing strategies. These are due to a number of factors, some of which are regionally specific. For example, Australasia combines positive, negative and norms-based screening into one bucket and does not track corporate engagement as a stand-alone strategy. In contrast to Australasia’s strategies, the United States does not track norms-based screening, and for the purposes of producing an overall tally of sustainable investing assets, they consider only the portion of corporate engagement assets that are deployed in filing shareholder resolutions on ESG issues.
2. The report indicates that in Europe the sustainable investing is based on norms and negative/exclusionary screening strategies. In line with the European Union Sustainable Finance Disclosure Regulation, the investment managers are required to incorporate sustainability risks in their investments that include negative/exclusionary screening, norms-based screening and ESG integration have become part of the expected practice of all financial products in the region.
3. This report suggests that while the majority of new fund offerings for 2020 were broad ESG funds, the environmental focused funds accounted for only 13% of new fund offerings.
4. In the United States, the regulatory policy environment for sustainable investing has drastically changed between the former and current administrations. President Biden’s administration has taken measures to mitigate or reverse the actions of the previous administration. In March 2021, the Securities Exchange commission issued a request for information on climate risk and ESG disclosures. This is expected to lead to a regulatory proposal for mandatory issuer disclosure on climate change and potentially a broader set of ESG issues.
5. In Australia, the Australian Prudential Regulation Authority (APRA) has highlighted the financial nature of climate change risks and strengthened its monitoring of climate change risk disclosures, whilst the Australian Securities and Investments Commissions (ASIC) has been progressing requirements for directors to consider climate change risk.
6. We are seeing a shift in sustainable investment strategies most commonly employed by investors. In 2018 exclusionary/negative screens were most common, but as of 2020 ESG integration has taken the lead. A mixed method approach has also become more pervasive, with investors across all regions employing multiple investment strategies. In Europe, new regulations stipulate ESG risks must be considered, hence negative/exclusionary, norms based and ESG integration are now expected practice.
7. The EU Taxonomy has now embedded the concept of double materiality into it's framework. Double Materiality implies that companies must report on both financially material risks and opportunities as well as environmental and social impacts, as defined by a threshold of significant contribution or harm. For investors in this region, these changes along with others, are expected to lead to an increasingly impact/outcome focused investment approach.
8. In newly developed and emerging economies, ESG considerations are being increasingly mandated, especially for pension and retirement funds. In Mexico, Chile and Colombia, pension funds have been mandated to integrate ESG and climate risks, whilst in South Africa sustainable and responsible investment requirements are being embedded in retirement regulation. Additionally, South Korea has seen the adoption of the Stewardship Code by the National Pension Service, which sets out principles to encourage corporate governance.